Late 19th-century finance: First financial globalization?
Political economy of finance in Europe: Week 1
What is global finance?
The economics textbook view
“The first phase lasted from 1870 to the First World War. During this time, rich countries constantly exported between 1–2% of their aggregate GDP to the rest of the world. Over time, it added up to a significant resource transfer from rich to poor. … In the capital market before 1914, the world’s poor were indeed the world’s borrowers and the rich countries the world’s bankers.” (Schularick 2016)
Old colonialism: The Dutch empire
- Vereenigde Oostindische Compagnie, founded in 1602
- ‘Business model’: War, slavery, and trade, mainly in Asia
- Nationalised in 1796; dissolved 1799
- All assets taken over by the government; VOC territories became government colonies
Old colonialism: The Dutch empire
- Problem: Financing long-distance, expensive, high-risk ventures
- Solution: ?
Old colonialism: The Dutch empire
- Amsterdam Bourse: Established 1602; world’s first stock exchange
- Place to trade VOC stock
- Initial number of VOC shareholders: 1000
- VOC shares amounted to a “financial revolution”, offering investors “prospects of speculative gains without serious loss of liquidity” (Gelderblom and Jonker 2004, 641)
Old colonialism: British empire
- Similar story for the British East India Company (EIC)
- Profits based on large-scale violence:
- From 1750s: war-making for territorial conquest as the EIC’s primary activity
- Over its life course, military expenditure accounted for 75% of the EIC’s expenses (Nogues-Marco 2021, 187).
British empire: Foreign & Colonial
- Financial innovation: Fund shares issued by the Foreign and Colonial Investment Trust (1868), the world’s oldest surviving closed-end (mutual) fund
- Purpose: cheap access to securities from a wider range of countries for the ‘investing public’
Finance & imperialism: The Hobson view
- A “New Liberal”, Hobson opposed classical, laissez-faire liberalism
- His antisemitism, while common at the time, tinges his analysis (Cain 2002)
- His critique of British imperialism became canonical: Capitalists in the metropole accumulated excess profits above and beyond what they could re-invest profitably at home; their consequent search for investment opportunities abroad fueled imperial expansion and exploitation:
“the endeavor of the great controllers of industry to broaden the channel for the flow of their surplus wealth by seeking foreign markets and foreign investments to take off the goods and capital they cannot sell or use at home” (Hobson 2011)
- Shared by Marxist theorists of imperialism: Lenin & Rosa Luxemburg
Testing Hobson-Lenin-Luxemburg
Hauner, Milanovic, and Naidu (2017) set out to test the Hobson-Lenin-Luxemburg thesis using historical data on investment returns. Results:
“The rich tended to invest overwhelmingly in foreign assets because they were, adjusted for risk, more profitable than available domestic opportunities.”
“To protect such foreign assets, whether portfolio or direct, the countries, partially at the instigation of investors in foreign assets, increased military investments.”
Fiscal policy: Maker of states
Fiscal shocks and state building (Queralt 2022)
‘Pawned states:’ Puzzle
- Sovereign borrowers in the Global South or periphery had weak ‘fundamentals’ and regularly defaulted on their foreign debt
- And yet, they had access to relatively cheap external credit
Fiscal policy: Unmaker of states
What is global finance, really?
“In other words, the rest of the world labored to increase the consumption and standard of living of the colonial powers, even as it became increasingly indebted to those powers.” (Piketty 2020, 283)
